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Minister of Energy of the United Arab Emirates, UAE, Suhail Mohamed Al Mazrouei attend a news conference after a meeting of the Organization of the Petroleum Exporting Countries, OPEC, at their headquarters in Vienna, Austria, Friday, June 22, 2018. (AP Photo/Ronald Zak)

OPEC agrees to pump more oil but crude prices jump anyway

June 22, 2018 - 2:57 pm

The Associated Press

VIENNA (AP) — The countries of the OPEC cartel agreed on Friday to pump 1 million barrels more crude oil per day, a move that should help contain the recent rise in global energy prices.

Questions remain, however, over the ability of some OPEC nations — Iran and Venezuela in particular — to increase production as they struggle with domestic turmoil and sanctions.

Oil prices rose after OPEC's announcement, which analysts cited as evidence that investors believe the actual increase in production will be smaller, about 600,000 to 700,000 barrels a day.

After an OPEC meeting in Vienna, Emirati Energy Minister Suhail al-Mazrouei said the cartel decided to fully comply with its existing production ceiling.

Because the group had been producing below that level, that means an increase in production of "a little bit less than 1 million barrels," the Emirati minister said.

How that translates into effective production increases is uncertain, as some OPEC countries cannot easily ramp up production. Iran, for example, has been hit by U.S. sanctions that hinder its energy exports. Venezuela's production has dropped amid domestic political instability.

The price of oil jumped after the announcement, with the international benchmark, Brent, gaining 2.5 percent to $74.84 a barrel in London, and U.S. crude climbing 4.9 percent to $68.72 a barrel in afternoon trading in New York — on track for its biggest one-day rise since OPEC agreed in November 2016 to cut production.

Al-Mazrouei noted that the decision "is challenging for those countries that are struggling with keeping their level of production." However, he indicated that some countries could pick up production if others lag.

"We will deal with it collectively," he said.

U.S. shale oil production has helped offset some of OPEC's cutbacks since 2016. However, operators in the Permian Basin of Texas face a shortage of pipeline capacity, "trapping a fair amount of oil and limiting the availability of that shale increase," said Jim Rittersbusch, a consultant to oil traders.

Still, some analysts believe that a combination of the OPEC deal, U.S. oil, and an easing of American demand for energy should eventually contribute to lower oil prices, which in May hit their highest levels in more than three years.

"Longer term, this is a bit of a win for consumers," said Jamie Webster, director of Boston Consulting Group's Center for Energy Impact. "More oil on the market means relatively lower prices for consumers."

Friday's decision means the Organization of the Petroleum Exporting Countries will observe the production level it agreed on in late 2016, when it cut output by 1.2 million barrels a day. In practice, the reduction was even deeper due to production problems. That has since then helped push up the price of oil by almost 50 percent.

Non-OPEC countries like Russia had agreed in 2016 to participate in OPEC's effort to raise prices, cutting another 600,000 barrels a day of their own production. They will discuss with OPEC on Saturday on whether to increase their production.

While OPEC's largest producer, Saudi Arabia, was open to higher production, Iran has been hesitant because sanctions imposed by U.S. President Donald Trump are making it difficult for the country to export its oil.

Trump has been calling publicly for the cartel to help lower prices by producing more. And after OPEC's deal on Friday, Trump tweeted: "Hope OPEC will increase output substantially. Need to keep prices down!"

Some analysts note that while Trump has blamed OPEC, his policies have also helped increase the cost of oil by, for example, limiting exports from Iran.

Some analysts believe that Saudi Arabia needs a Brent price closer to $90 a barrel to cover its domestic spending but is feeling pressure from the United States to head off rising prices by boosting output. Russia may be happy to pump more oil and settle for prices in the $60s, according to Tamar Essner, chief energy analyst for Nasdaq.

There are other considerations than dollars and rubles.

Daniel Yergin, the vice chairman of research firm IHS Markit and author of several books on the energy industry, says geopolitical factors are a big element in the oil production talks.

Yergin said Saudi Arabia and the United Arab Emirates support the current, tougher U.S. policy toward Iran, Saudi Arabia's rival for influence in the region. So they will want to support Trump's call for higher production and lower prices. Iran will struggle to increase production, meaning it could lose market share and revenue to its rivals.

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Anthony Mills in Vienna, Geir Moulson in Berlin, Rob Stevens in London, and David Koenig in Dallas contributed to this report.